ATM reforms, two years on.

Earlier this year the RBA released a new report on ATM reforms. And, guess what, simple, smart economic reform still works!

As a reminder the reforms involved removing foreign ATM fees and replacing them with direct charging. So instead of the ATM company charging your bank when you use its ATM, and then your bank charging you, so that you only find out the cost if you closely read your monthly statement, the ATM charges you directly, giving you the option of cancelling the transaction once you see the price. Importantly, these were not new charges – the reforms simply made existing charges transparent to consumers.

Technically, the reforms eliminated the ‘interchange fee’ that was previously charged by the ATM company to your bank. The RBA didn’t ban banks from charging ‘foreign fees’ to customers but strongly discouraged them given that there was no longer an interchange fee with the foreign ATM. However, most financial institutions did abolish ‘foreign fees’ within a few weeks of the reforms. Either fear of bad publicity and/or competition worked.

The RBA estimated that the reforms saved consumers $120m in fees in the first twelve months. This saving came from a mixture of changed consumer behaviour and new entry into the provision of ATMs.

What does the follow up study show? Well, two years in, the reforms still are working. As they note:

All of the available information continues to suggest that consumers are responding to the pricing signals inherent in direct charging, and ATM owners are responding by increasing the availability of ATMs.

Graph 1 from the report highlights the change in consumer behaviour following the reforms in 2009.

They look in more detail at how competition has worked from the consumer perspective. We would expect two effects. First, that some consumers, seeing the ATM fee, would cancel the transaction to avoid the expense. More importantly, we would expect consumers to punish banks with few ‘free’ ATMs in the market place. The RBA shows that both these effects have been working.

Around 10 per cent of respondents indicated that they had planned to make an ATM cash withdrawal in the past month but cancelled the transaction because the ATM owner charged a fee.

and

There has also been an increase in the number of agreements between card issuers and ATM owners to provide free transactions to cardholders … financial institutions compete for depositors partly by providing direct-charge-free transactions on a wide network of ATMs

Other than gloating about the success of simple economic reforms, there are three things worth noting.

First, the reforms could be considered a victory for the soft paternalism sometimes promoted by behavioural economists. The fees were always there, it was just that consumers didn’t respond to the fees before. The reforms have helped consumers to respond appropriately to the fees.

Of course, for non-trendy neoclassical economists, reading your monthly statement takes some effort for little benefit so the reforms can be seen as eliminating a small cost that previously led to poor decisions.

Either way, the success of the reforms show the benefits of well crafted moves to improve pricing transparency. And graph 5 from the March RBA paper shows that the transparency means that those consumers who do pay the foreign ATM fees know exactly what they are doing.

Second, the reforms may have led to the recently announced changes to EFTPOS. Cash withdrawals through EFTPOS (which are free) have soared while foreign ATM withdrawals have fallen. So it comes as no surprise that the banks now want to charge consumers for using EFTPOS.

Finally, while fewer consumers are paying foreign ATM fees, the fees themselves have not fallen. Part of this is due to new ATMs being deployed in areas that previously were not profitable, often with the ATM company sharing the revenue with the venue owner.

Direct charges tend to be higher in licensed venues than other locations, followed next by retail premises. These appear to be locations where there are no competing ATM providers on site and customers are willing to pay for the convenience of not having to leave the store or venue. These locations are more likely to be served by an independent ATM, with a substantial portion of the direct charge revenue being shared with the owner of the premises.

However, it is also difficult for consumers to comparison shop. If there are two foreign ATMs in a venue then you need to go part way through a transaction with both machines to find out the two prices. There is nothing stopping more explicit advertising of the price but this hasn’t occurred.

So the reforms are not perfect – just a lot better than the situation without the reforms.